Shanghai Rongtai Health Technology Corporation Limited's (SHSE:603579) Shares Bounce 38% But Its Business Still Trails The Market

Despite an already strong run, Shanghai Rongtai Health Technology Corporation Limited (SHSE:603579) shares have been powering on, with a gain of 38% in the last thirty days. The last 30 days bring the annual gain to a very sharp 53%.

In spite of the firm bounce in price, Shanghai Rongtai Health Technology's price-to-earnings (or "P/E") ratio of 20.1x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 39x and even P/E's above 75x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Shanghai Rongtai Health Technology has been in line with the market. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Shanghai Rongtai Health Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Rongtai Health Technology.

Is There Any Growth For Shanghai Rongtai Health Technology?

Shanghai Rongtai Health Technology's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 11% decline in EPS over the last three years in total. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 15% as estimated by the two analysts watching the company. With the market predicted to deliver 36% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Shanghai Rongtai Health Technology's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shanghai Rongtai Health Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Shanghai Rongtai Health Technology's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Rongtai Health Technology, and understanding should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.